Developing Concerns : Video Game Development Lawyers & Attorneys: Reed Smith Law Firm: Intellectual Property, Marketing, Promotions & Privacy Law

One of the joys of being a lawyer is that you get paid to think about risk.  Well, not so much "think about" as "eat, sleep, and live" risk.  It's inherent in the job we do.  "Can I do X," says the client.  "Well," says the lawyer, "if you do, there is a risk that..."

And when this speech starts rolling, you can almost feel the business team's eyes rolling into the backs of their skulls.  It's not that the business doesn't care about risk.  Most business people, in my opinion, do care about risk.  They just don't value it the same as lawyers.  The "why" of this is not something I can speak to with any expertise, but I think one contributing factor is a mismatched perception of when a deal has been sufficiently finalized to control for risk.

Take, for example, a fairly typical license deal cycle.  An idea is generated, business people talk to business people, and a tentative arrangement (the "cocktail napkin" arrangement) is hammered out.  Then (hopefully) the legal team is brought into the loop, and sometimes is told something like "we need a term sheet today," or "a full agreement will kill this deal," or "if we don't get something -- anything -- in writing today, someone else will swoop in and take the deal."  So the legal team hammers out a short term sheet with some, but not all, pertinent language in it, and puts a little gem like this at the bottom:

The parties will use good faith efforts to execute a long-form agreement within X days of the effective date of this term sheet.  Until such time as the long-form agreement is executed, this term sheet will remain in effect.

On the one hand, you've got a signed agreement, so the business is happy.  They're excited to start work.  They might even start work on the assumption that any remaining details will be worked out at a later date.  After all, you've "papered the deal," right?

On the other hand, the lawyers know that the agreement you've signed is woefully insufficient at controlling a variety of foreseeable risks.  Not everything can be crammed into four or five pages, and risk mitigation for certain circumstances is often left out in favor of the more salient deal points like timing, money, etc.  And yet there is no obligation to do anything about it on their party - "good faith efforts" is not the same as "you will."

Thus, you've got a split in perception of risk control, and so long as the business thinks the deal's risks have been dealt with, their incentive to push through the long-form will be reduced.  Then attention gets directed elsewhere, and before you know it, you're at the end of the deal cycle and the long-form never got signed.

Fortunately, situation such as this sometimes blow up and stand as a cautionary tale for others to learn from.  Take this one for example: last week, a Swedish company called ProCloud Media Invest AB sued Paramount Pictures for backing out of a licensing arrangement for ProCloud to develop games based upon Paramount's entertainment properties. ProCloud's lawsuit claims that it paid Paramount Pictures $1 million and "fully performed" the dutuies of a "co-producer," but the studio shuttered its digital entertainment division before ProCloud could started producing the subject to the license.  Now, ProCloud is suing Paramount for $10 million.

Digging into the complaint a little bit, one learns that the parties executed a "deal memo" and an amendment to the deal memo, but never executed the full, long-form agreement.  The complaint further alleges that four weeks after executing the amendment, Paramount shut down the digital entertainment studio.

Out the outset of some (brief) analysis, let me be clear.  I HAVE NOT READ THE DEAL MEMO OR THE AMENDMENT.  I don't know what these documents say, nor am I expressing any opinion about what either party should or should not have done in this situation. Rather, having been in situations similar to this, I can tell you that termination provisions in deal memos do not tend to be overly extensive.  It would be a rare deal memo that contemplates a termination provision for a complete shuttering of the business line.  Meanwhile, a full license could (should) include well-crafted license termination conditions. 

So, as a lawyer for a video games company, or perhaps a business development team member who plays a bit of a legal role, how can you ensure that you get the protections of the long-form while facing the inertia of a business that just wants to move forward?  Here are some tips to consider:

1. If possible, set an expiration date on the deal memo.  If you set an expiration on the deal memo or, say, 60 days after signature, this puts a lot of incentive on all parties to come to the table and negotiate the long-form.  It is a much better way to ensure that a long-form gets done as opposed to the "gem" stock language from above.  Of course, this is not something that you can get into every deal, but can be a powerful tool when appropriate.
    
2. Tie specific provisions to long-form execution.  One of my favorites is tying the payment schedule to the long-form execution, as opposed to payment on execution of the deal memo.  Money gets everyone's attention, so even if you can't put a short expiration date into the deal memo, tying the long-form execution to the payment schedule is a way to build a similar incentive.
    
3. Make sure the long-form is in your queue.  All too often, the responsibility for ensuring execution of the long-form falls through the cracks because the business thinks legal is handling this, and legal thinks the business is driving it.  Take ownership of this up front, keep the business people in the loop on its progress.  This will show the business that you - legal - are taking this seriously, which can communicate more about risk control than any conversation you could have with them.  
    
4. Take the time to put license terminations into a deal memo.  Know that even if you follow the above tips, you may find yourself operating under a deal memo for an extended period of time.  Company cultures, industry norms, development schedule - all of these can give rise to a situation where is it not tenable to negotiate out a long-form.  In such situations, even basic "the license may be terminated at licensor's discretion in the event that..." provisions can be lifesavers.

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Those of us who watch legal developments in the video games and new media industries have been following the Xbox 360-related battle between Motorola (now owned by Google) and Microsoft for quite some time.  We at DevelopingConcerns been waiting for a resolution from the International Trade Commission before writing a post, so that we can provide our dear readers with those little nuggets of wisdom we've become (not all that) famous for (as opposed to our atrocious attempts at humor, which of course have subjected us to public ridicule the Internet over).  

Well, waiting until a final resolution isn't going to happen; we're writing this up midstream.  Why?  Because the recent involvement by Capitol Hill lawmakers, and potential impact of the ITC granting an exclusionary order (more on his later), make this a perfect time to jump in.

By way of background, the International Trade Commission is an independent governmental agency which conducts investigations and provides general trade research to both the executive and legislative branches of government. The ITC is responsible for, among other things, investigations under Section 337 of the Tariff Act of 1930 (19 U.S.C. § 1337), prohibits certain unfair practices in import trade, including the infringement of certain statutory intellectual property rights and other forms of unfair competition in import trade to be unlawful practices. A lot of Section 337 investigations involve allegations of patent or registered trademark infringement, although other forms of unfair competition (e.g., misappropriation of trade secrets, trade dress infringement, passing off, false advertising, and violations of the antitrust laws) may also be asserted.

The instant case - the Motorola v. Microsoft Xbox 360 case - focuses on patent infringement issues.  More specifically, it focuses on the use of so-called "standard essential patents" (or "SEPs") in Xbox 360s.  SEPs are those patents that are an integral and necessary part of an industry standard, and typically are shared amongst all players in a particular industry in order to ensure that all devices/technologies within that industry adhere to the applicable standard.  In exchange for contributing the SEP to the standard, the company holding the patent will be paid a license on reasonable and non-discriminatory (or "RAND") terms.  [Note: internationally, the term is often referred to as "FRAND," or "fair, reasonable, and non-discriminatory" - the two acronyms are basically interchangeable). 

In this case, the most important SEPs at issue are those covering the H.264 video compression standard, and the 802.11 WiFi standard.  Theoretically, if Motorola demanded RAND fees, and Microsoft paid them, then Microsoft would have the right to incorporate these SEPs into the Xbox 360, so as to ensure that the device plays nicely with everything else that makes use of these SEPs (wireless routers, Internet video playback, etc.).  And life would go on as normal.

Of course, that didn't happen.  The reason is because Motorola and Microsoft could not come to an agreement on the nature of RAND fees.  The potential reasons for the failure to agree are too numerous to speculate, so suffice it to say that the parties couldn't come to terms, and so an ITC complaint was filed and an investigation was launched. 

That was in 2010 (see 75 FR 80843 for the official announcement of the launch of the investigation).  A lot has occurred since then.  For a blow-by-blow recap, read through the excellent coverage that Florian Muller at FOSS PATENTS has put together - complaint, announcement of initial decision, and the release of initial decision.  Here's what you need to know:

• The Administrative Judge (the first hearing officer at the ITC) has found that through incorporation of the at-issue SEPs into the Xbox 360, and by not coming to terms on RAND licensing fees, Microsoft has infringed upon the patent rights of Motorola
   
• Motorola, however, has appeared to act in ways that are somewhat disingenuous, and contrary to the entire ideal of SEPs.  Specifically, Motorola did not seek "reasonable" licensing fees from Microsoft.
   
• Notwithstanding Motorola's actions, Microsoft did not prevail the equitable defenses, and so the Administrative Judge recommended an exclusion order (an import ban) on Xbox 360s (at least until the parties agree on licensing fees for the SEPs).

Read the full public version (which is redacted in part) of the initial decision (via Wired.com).  The judge has some very choice words for Motorola's conduct, and indeed suggest that Motorola never intended to grant RAND terms.  That's what's really interesting about this case: if a system is built upon all industry members agreeing to a particular standard, what happens when the holder of the patent related to that standard starts acting in ways that are not "reasonable" or "non-discriminatory?"

Fortunately for this blog, lawmakers from both sides of the aisle (or perhaps more accurately, from different parts of the country) are weighing in on this question, and both companies are seeing support from Congressmen for their respective positions.  Predictably, Microsoft is getting support from Washington's Congressional delegation, and Motorola is getting support from Illinois (former home of Motorola, before the Google acquisition).  The Congressmen and Congresswomen are casting the battle as one of public policy versus strong IP protection - of fair play and the American economy over rewarding those who spend time and money inventing new technologies.  Only time will tell which side - if either - is victorious.

In the meantime, does this mean that the Xbox will be banned from the US?  Certainly not in the short run.  Now that the Administrative Judge's initial decision has been rendered, the case will go to the six-member Commission, which can review, modify, overturn, or accept the initial decision.  The deadline for this is August 23rd.  After that, the Commission's decision will go the President, who has 60 days to decide whether to accept or overturn the decision.  Therefore, Xbox 360's won't be yanked from store shelves anytime soon.  In the long run, I'd say it's unlikely that Xboxs will be banned in the US because Motorola's conduct (as reported in the initial decision) suggests it never intended to grant Microsoft a license.  My personal feeling is that, at some point, public policy will come into play (perhaps at the ITC, or perhaps at the administration level), and Motorola's apparent unwillingness to negotiate RAND fees will come back to bite it.  The law may require a different answer, but my gut says that somehow, we'll find a solution to this issue that allows Xboxs to stay on the market. 

Of course, no gut feeling is ever 100% right, so we will keep watching this case (and so should you) as the eventual result could have significant ramifications throughout any industry that takes advantage of mutually agreed-upon standards.  If our legal system can be used to destroy the current status quo of standards-related industries, then either industry will need to come up with a new legal solution (escrowing the IP for blind distribution as determined by a neutral trustee?) or we will find ourselves back to the format wars.  The later is not the most efficient way to progress.  Ask anyone who bought into laser discs over DVDs, or HD-DVDs over Blu-rays, how great format wars are.

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This post was written by Marc Kaufman and Gerard Dovonan, members of Reed Smith's patent team.

Combine the rising prominence of video games as both an entertainment and expressive media with and the emerging popularity of cloud computing, and it makes sense that cloud-based gaming has become a very popular concept.  Cloud-based gaming allows users to directly stream and play video games over an Internet connection.  As opposed to networked and Internet gaming that has been around since at least the ‘90s, cloud-based gaming involves the game actually running on a remote server and a user playing the game through a client connected to the server.  This allows clients to play games that would ordinarily require powerful game consoles or high-end computers on lower resource computers and consoles – and in the future potentially tablets and smartphones.  Additionally, a user can instantly access new games without downloading them and may play from any location with a fast enough Internet connection.

With the huge potential for growth in the industry, it is no wonder that the industry took notice when OnLive, Inc. received US Patent No. 7,849,491, titled "Apparatus and Method for Wireless Video Gaming," in December.  However, the granting of the patent is only the tip of the iceberg.  The questions everyone in the industry should be asking themselves are 1) am I – or do I plan to be – potentially infringing this patent and 2) is this patent even valid?

In an article published by Gamasutra, David Perry, game industry veteran and CEO of cloud-based gaming company Gaikai, said he isn’t worried about the patent.  From the article, Perry seems to write off the patent.  First, Perry is quoted as saying that he doesn’t expect the general concept of remote gaming to be patentable.  Then the article goes on to explain that the patent claims are focused on a set-top-box style of streaming game delivery that would not overlap with Gaikai’s business model. 

We are not sure Perry should be writing this patent off so easily.

For one thing, the application for this patent was filed in 2002, an early date in the space of cloud-based gaming.  Further, even though Perry’s opinion that the concept of cloud-based gaming is unpatentable may well be true, the claims of this patent are more focused, beyond just the general concept.  The wording of the claims appears to allow for the claims to cover a wide variety of gaming devices.  For example, while claim 1 recites "operating a video game box;" this phrase could be broadly construed to include many computing devices.  It would be prudent for the cloud-based gaming industry to give this patent due consideration.

That said, a broad construction of claims cuts two ways.  Broader claims risk being found invalid. Ultimately, in this case, the long prosecution history may play a vital role in how broadly the claims may be construed and whether they are valid.  Without offering an opinion either way, it seems clear that this patent could stir up some controversy.

Finally, this patent does not stand alone.  It is part of a very large "family" of patent applications directed to similar subject matter.  Of the 74 patent applications in the family, 39 remain pending and in various stages of prosecution. These applications cover a broad range of technologies, such as "System for streaming databases serving real-time applications used through streaming interactive video," "System for acceleration of web page delivery," and "System and Method for Compressing Video Based on Latency Measurements and Other Feedback."  OnLive clearly develops many peripheral technologies that may also be fundamental to the growing cloud-based computing industry.  More importantly, OnLive could be building a valuable patent portfolio protecting these vital technologies.

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Tournament play – it’s a stalwart of today’s video game experience. And it leads to some very interesting questions. For example:

• Is it possible to hit drives of nearly 400 yards in Tiger Woods 11? [Answer: it shouldn’t be, but somehow, it happens]
• When is it right to aim for a teammate instead of an opponent? [Answer: only if they owe you money]
• Or is the Golden Tee Online Tournament play illegal gambling? [Answer: sorry everyone - this answer you have to pay for].

Today’s interesting legal question regarding online tournament play is: are online tournaments the sole province of one person or company? The plaintiff behind a recent lawsuit filed against Activision, Blizzard, and Zynga may answer "yes."

The suit at issue was filed by Walker Digital - the parent company of Priceline.com – and alleges that Activision, Blizzard, and Zynga infringed patented technology that allows players to compete in online tournaments. The patent-in-suit - U.S. Patent Number 6,425,828 – is described as:

A method and a system for a distributed electronic tournament system in which many remotely located players participate in a tournament through input/output devices connected to a central controller which manages the tournament.

The method, as described in the patent, includes the steps of:

(a) uniquely identifying a player communicating with the central controller via an associated input/output device;

(b) responding to payment of an entry fee by the player for allowing the player to participate in a tournament occurring within a fixed time window via an associated input/output device;

(c) accessing a database to store in the database player information that is generated as the player participates in the tournament, such information being available for use in a subsequent tournament, which is administered by said controller and in which the player participates; and

(d) awarding the player a prize for achieving a preestablished performance level in the tournament.

The games at issue include some of the most famous titles in online game history – World of Warcraft, Call of Duty, Mafia Wars, 007: Goldeneye, DJ Hero 2, and others.

I’m not a patent lawyer (as I’ve said a few times on this blog), but I have to wonder how this patent is not subject to prior art issues. After all, online tournaments were around long before 2001 (the patent’s application date).

In addition, what exactly constitutes an "entry fee" for the purpose of this patent? The patent itself seems to suggest cash or cash-equivalent, since part of the "user information" is "billing information." But what about virtual currency, or "points." If a tournament accepts entries based upon points accumulated in the game, would that still fall under the patent-in-suit?

We will definitely be watching this case for future developments. Stay tuned.

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The landmark trial against alleged XBox modder Matthew Crippen has been dismissed by federal prosecutors.  The dismissal comes after the judge in the case publicly berated prosecutors, and raised "serious concerns about the government's case." 

For those of you unfamiliar with the case, the defendant was charged with violations of the Digital Millennium Copyright Act (commonly referred to as the DMCA) as a result of his modding XBox consoles to run "other than authorized" software.  According to the charges filed against the defendant, the modding violated 17 U.S.C. Section 1201(a)(1)(A), which makes it a crime to circumvent technological measures designed to control access to copyrighted works.

Based on the fact that the government dismissed its case, and the judge questioned whether the government had enough to bring the case in the first place, one can assume that modding is completely legal, right?  Not exactly.  This was just one case, with arguably bad facts for the government.  Another case, with another set of facts, may have an entirely different outcome.

Here's what we know about modding - it is, by definition, an issue under the DMCA if there is software involved.  Software is subject to copyright protection, and based upon the additions to copyright law made by the DMCA, actions you take to circumvent technologies designed to protect that software may constitute copyright infringement.  But that is not the end of the story, because the DMCA contains several exemptions to its anti-circumvention statutes, and there is the overriding defense of fair use that may be applicable as well (though the Crippen case has made it less likely fair use will apply, at least in modding-for-profit cases).

The DMCA exemptions specifically state that certain kinds of modding, from jailbreaking and unlocking cell phones to creating video mash-ups from DVDs, do not violate the DMCA's anti-circumvention laws.  While these exemptions might be of interest to the video games industry in certain situations, there is one exemption that is tailored just for us:

Video games accessible on personal computers and protected by technological protection measures that control access to lawfully obtained works, when circumvention is accomplished solely for the purpose of good faith testing for, investigating, or correcting security flaws or vulnerabilities, if:

(i)  The information derived from the security testing is used primarily to promote the security of the owner or operator of a computer, computer system, or computer network; and
 

(ii) The information derived from the security testing is used or maintained in a manner that does not facilitate copyright infringement or a violation of applicable law

If we unpack that statement a bit, it boils down to QA.  If your modding is done so you can test the security of the system used to protect the underlying work, then the modding is likely to be acceptable.  Other modding behavior, such as that engaged in by Mr. Crippen, is more questionable.

Then there is the overriding defense of fair use.  Fair use, as embodied in 17 U.S.C. 107, may seem easy to describe in the abstract, but it is difficult to grasp in its totality.  It basically says that certain activities, which in the abstract may meet the definition of copyright infringement, are nevertheless acceptable because of the good they do.  Examples of "classic" fair use activities involve teaching, criticism/commentary, etc.  However, each application of fair use turns on the facts at hand; there are no bright line rules when it comes to fair use - some commentary can still qualify as copyright infringement (see Gawker's battle with former governor Palin over her upcoming book).  So any modders hoping to rely on fair use should be wary of this strategy.  After all, fair use did not work so well for Matthew Crippen (PDF).

What, if anything, can be learned from this first modding trial?  First, modding is something that console manufacturers take seriously.  While modding may not turn into the same legal quagmire that file sharing has, it is still something that console devs take seriously.  And with both criminal and civil penalties available under the DMCA, anyone tinkering with console hardware or software should do the same.  Second, there is now one decision finding against fair use for modding-for-profit activities.  This is not an automatic bar for all future modding cases, but it does make a future defendant's case that much more difficult.

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This morning, Attorney General Eric Holder announced the seizure of 82 websites used to traffic and/or sell counterfeit goods - everything from Timberland shoes and clothes to movies and music.  The sites were seized pursuant to 18 U.S.C. 981 and 18 U.S.C. 2323.  A full list of the sites seized is provided by Wired.com.

This crackdown, which was timed to coincide with "Cyber Monday," is part of "Operation Within Out Sites 2.0," and according to the Department of Justice, primarily targeted “online retailers of a diverse array of counterfeit goods, including sports equipment, shoes, handbags, athletic apparel and sunglasses as well as illegal copies of copyrighted DVD boxed sets, music and software.”  Hence the interest to the games community.  After all, piracy is not limited to just golf clubs and MP3's.

One interesting question is whether this seizure was done in response to the Senate Judiciary Committee's recent actions with regard to S.3804, also known as the Combating Online Infringement and Counterfeits Act, or COICA.  COICA sailed with unanimous approval through the Senate Judiciary Committee, and will be placed on the Senate's legislative calendar for the remainder of this session.  However, Senator Ron Wyden (D-Oregon) has threatened to block the legislation, and the bill itself has come under fire for the perceived ability of the US government to censor the internet at large.

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In video games-related Supreme Court news that has nothing to do with the Governator or obscenity (so please, try to stay interested), the Court has agreed to hear a dispute between Stanford University and Roche Molecular Systems Inc. over whether individual inventors or contractors retain intellectual property rights to federally funded inventions.

The case concerns the Bayh-Dole Act, which allows institutions such as universities, nonprofits and small business contractors to retain the rights to inventions created through federally funded research.  Check out Patently-O's analysis of some of the confusion surrounding Bayh-Dole.  The question before the Supreme Court is whether the law allows inventors employed by these institutions to unilaterally assign intellectual property rights to a third party.

For the record, I am not, nor do I think I could even pretend to be, a patent lawyer.  So I'm going to tread carefully here.  More after the jump.

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